Against Intellectual Monopoly

technology
transfer and the cost of information, is the other phenomenon of economists
who believe that innovators have no first-mover advantage, while writing
a voluminous literature on the strategic advantages of being first. These
strategic advantages are well documented: Fudenberg and Tirole's text on game theory is one example,9 while Rudyard Kipling is a less obvious
one:

    The most striking implications of the first-mover advantage, may, however, lie elsewhere. They are captured by the observation first made by Jack
Hirshleifer, that the innovator, by virtue of inside information, may be able
to earn vastly more than the social value of the innovation." To understand Hirshleifer's argument, consider the recent innovation of the Ginger
scooter, now relabeled the Segway, which was said to revolutionize urban
transportation, and grant that this unlikely prediction was actually true.
How could the inventor, Dean Kamen, profit from this knowledge? There
was a point in the development of the scooter at which Mr. Kamen was the
only one to know that urban transportation is soon to be revolutionized, and
that the automobile itself is soon to be obsolete. Rather than surround himself with patents, and hawk his knowledge to venture capitalists, as he did,
he could simply have sold short automobile stock using whatever funds he
had available to him and leveraged to the maximum extent possible. Then,
rather than develop the scooter himself, he should simply have mailed the
blueprints to the New York Times. As soon as the blueprints were published,
the stock-owning public would naturally realize that the automobile industry is on the way out, and the price of automobile stocks would plummet.
Mr. Kamen, having foreseen this, and having sold short the stocks prior to
publishing his blueprints, would naturally have made a killing.
    In practice, of course, whatever Mr. Kamen's representations to venture
capitalists might have been, the Segway has not revolutionized the transportation industry, nor was it likely to have done so, and shorting automobile stocks would have been a risky proposition. (Although in retrospect, it
would have been a good decision for other reasons.) This is, after all, the
way in which the billionaire turned social progressive George Soros made
most of his money - by selling short the British pound in 1992 - only Soros'
predictions were correct. But invention is a risky business in general, and
the intellectual monopolist who has a valueless idea does not generally fare so well either. Indeed, even with the benefit of patent protection, Mr. Kamen
has become less than immoderately wealthy by virtue of his innovation.

    There are more obvious and more common advantages of being first
mover. The primary advantage is simply that it takes time and money to
reverse engineer a product. That is, in the example of this book mentioned
previously, without copyright we would be in immediate competition with
you as soon as we sold you a copy. Still, you would have to own a printing
press and a distribution chain to start competing with us - well, with
Cambridge University Press - and those things cost quite a bit. Still, there
is a sense in which, if you were another university press, by purchasing a
copy of this book you could, in a world without copyright, have a relatively
inexpensive go at making copies of it. Of course, as we observed in the case
of government documents, this does not take all the profit out of writing
books. No matter, for books, music, and videos, reverse engineering appears
to be relatively cheap; hence, the competitive solution lies somewhere else.
Where? One can easily learn either by looking at what American publishers
did around 1870 - flooding the market with lots of cheap copies of the
book, thereby making life for anyone but the cheapest of the cheap imitators
impossible - or by going back to the preceding theoretical diagram. When
the innovator begins production with a very large capacity, the size of the
residual competitive rent left for even the first imitator becomes very small,
so small that, in general, it will not be profitable to imitate.
    In most real-world cases, reproduction and reverse engineering are, in
fact, expensive in the short run. Books, music, video, and copyrightable
items can be encrypted, and it takes time and money to crack encryption
schemes. New products, not to speak of new processes, are generally costly
to